Investors tend to get caught up in short-term market moves. Right now, the big headlines are all about the geopolitical conflict in the Middle East. And, of course, the impact that it is having on energy markets. Before you jump into an oil stock, you’ll want to think about what happens when the conflict cools and oil prices start declining.
If you want to buy an oil stock right now and hold it for decades, you’ll probably find midstream giants like Enbridge (NYSE: ENB) and Enterprise Products Partners (NYSE: EPD) more interesting than an oil producer. Here’s why.
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The core of Enbridge’s business is its oil and natural gas pipelines. The company collects fees for the use of these energy infrastructure assets, as it helps to move oil and gas around the world. It is a toll-taker business, so the volume of energy it moves is more important than the price of the products it is transporting. Given how vital oil and natural gas are to the modern economy, Enbridge tends to generate reliable cash flows through the energy cycle.
In addition to the core midstream operation, Enbridge also owns a regulated natural gas utility business and renewable power assets. These also generate reliable cash flows but offer the added benefit of diversification beyond the oil industry. Enbridge has increased its dividend, in Canadian dollars, for 31 years. The dividend yield is currently around 5.2%.
Enterprise Products Partners is a competitor to Enbridge. However, the master limited partnership (MLP) only operates midstream assets. So its cash flows aren’t as diverse as Enbridge’s. Some might see it as a negative, while others might see it as a positive. Enterprise’s yield is currently 5.8%, and the distribution has been increased annually for 27 years. That is basically as long as the MLP has been publicly traded.
That said, there is one key characteristic that Enterprise and Enbridge share. In both cases, their lofty yields are likely to make up the lion’s share of an investor’s return over time. They are, at their core, slow-growth businesses that are designed to be boring and to provide reliable income streams.
Wall Street routinely projects current events too far into the future. Oil prices are rising right now, but history suggests they will eventually decline. If you are a buy-and-hold investor looking at the energy sector today, you’ll be better off with businesses that sidestep commodity prices, like high-yield Enbridge and Enterprise. That way, you can comfortably generate a lofty income stream for decades to come.